At the end of 2019, Congress passed the Setting Every Community Up for Retirement Enhancement (SECURE) Act. Significant tax reform bills do not happen frequently and this is the second one in the last two years after the Tax Cuts and Jobs Act (TCJA) passed in 2017. While not as extensive as the 2017 legislation, we wanted to provide a quick summary of some of the changes.
Required Minimum Distribution (RMD) Increases to Age 72
The starting age for mandatory distributions from pre-tax retirement accounts such as 401(k)s and Traditional IRAs was increased from age 70.5 to age 72. More than anything, this change will make the math easier to find out if you are required to make a distribution from your retirement account in the given year. For individuals that are already taking RMDs, there are no changes. For individuals that turn 70.5 after 12/31/2019, RMDs will not be required until the year that individual turns 72. Mirroring the current rules, the first RMD can still be delayed until April 1st of the year after an individual turns 72.
Qualified Charitable Distributions (QCD)
For individuals that would like to use distributions from IRAs to fund charitable endeavors, the age limit for QCDs still remains at 70.5 despite the RMD age increasing to 72. This means that you may make a QCD if you are at least 70.5 and it will not count as taxable income. The maximum QCD in any given year is still capped at $100,000.
Traditional IRA Contributions Allowed Beyond 70.5
The SECURE Act allows for Traditional IRA contributions regardless of age as long as an individual has earned income. This will help older workers contribute to their respective futures in a tax-advantaged way.
Stretch IRA - New 10-Year Rule
Starting 1/1/2020, any new inherited IRA must be distributed by the beneficiary by the end of the 10th year the inheritance was received. This is a significant change from the current rules that allow for distribution to be taken over the beneficiary's lifetime. The rule does create "eligible designated beneficiaries" such as spouses where the 10-year rule does not apply. Since all new inheritance distributions must be taken within 10 years, but not necessarily every year, there are significant planning opportunities to make sure that that income is distributed in the lowest possible tax-bracket years.
Additional Changes
Outside of the changes mentioned above, there are also several other updates that are not listed above. If you are interested in reading further into the tax law changes, below is a link that we recommend.